Oct. 13 (Bloomberg) -- Federal Reserve officials moved
closer to setting targets for economic performance such as
inflation to decide how long to keep interest rates at a record
low, an action analysts said may come as soon as next month.

Most of the central bank’s 17 governors and regional bank
presidents “saw advantages” in the approach and judged it
would make policy more effective, the Fed said yesterday in
minutes of its Sept. 20-21 meeting in Washington. Some officials
wanted to keep more bond purchases as an option, the minutes
said.

Chairman Ben S. Bernanke is trying to find new ways to spur
growth and reduce joblessness stuck around 9 percent, while
cushioning the economy from risks including the housing slump
and Europe’s debt crisis. He may set the new policy benchmarks
as early as his planned press conference following a two-day
gathering of policy makers on Nov. 2, said Michael Feroli, chief
U.S. economist at JPMorgan Chase & Co. in New York.

“That seems like a logical next step” by officials should
they decide the economy needs another jolt, said Feroli, a
former Fed researcher. “There’s pushback in terms of properly
implementing it, but the idea itself didn’t seem to generate a
lot of intrinsic opposition” at the meeting last month.

Philadelphia Fed President Charles Plosser told reporters
yesterday that policy makers are struggling over how to improve
public understanding of their actions, and he doesn’t predict
they’ll resolve the issue at November’s meeting.

Hinge on Inflation

The Fed could make it clearer how its policies hinge on
inflation, inflation expectations and employment, he said after
a speech in Philadelphia. Some Fed officials support
incorporating the so-called Taylor Rule, which measures where
the policy interest rate should be set based on inflation and
growth, said Plosser, one of three officials to dissent from the
easing in August and September.

A portion of officials suggested at the meeting that the
Summary of Economic Projections, which explains policy makers’
forecasts and will next be released Nov. 22, could be a vehicle
for providing more information about the Fed’s long-run goals
and the “likely evolution of monetary policy,” the minutes
said.

The Fed’s challenge is deciding which “economic
mileposts,” or variables, to use, said Dana Saporta, a U.S.
economist at Credit Suisse in New York. The Fed would have to
choose between measures of employment, including the jobless
rate and changes in payrolls, and between inflation gauges that
the Fed prefers or are better known to the public, she said.

‘Very Tricky’

“The unemployment rate is a very tricky statistic these
days because it’s being moved around by forces other than job
creation,” Saporta said. A drop in labor-force participation
accounts for much of the decline in the unemployment rate to its
most recent level of 9.1 percent in September from 10.1 percent
in October 2009, Saporta said.

Fed officials also discussed ways to better specify the
central bank’s long-run objectives for inflation and jobs, the
minutes said. U.S. central bankers currently stop short of
formal targets for prices or unemployment, instead stating
levels that represent where data would “converge over time
under appropriate monetary policy and in the absence of further
shocks.”

Several policy makers last month were reluctant to identify
an unemployment goal, because it’s influenced “importantly by
nonmonetary factors,” in contrast to a central bank’s control
over inflation, according to the minutes.

Cut Unemployment

Only Chicago Fed President Charles Evans has publicly
supported the idea of allowing consumer-price increases faster
than 2 percent annually as a way to lower unemployment. The
interest-rate commitment should be contingent on joblessness
falling to around 7 percent or 7.5 percent as long as inflation
stays below 3 percent in the medium term, Evans said Sept. 7.
Fed policy makers aim for long-run inflation of about 1.7
percent to 2 percent.

Fed officials debated the changes as part of a wide-ranging
discussion of policy tools last month, the minutes showed. The
meeting culminated in the Federal Open Market Committee’s
decision to replace $400 billion of Treasuries in the central
bank’s portfolio with longer-term debt to reduce borrowing costs.
Three officials dissented.

Bernanke said last week the so-called Operation Twist
program is a “significant step but not a game changer” for
reviving growth and reducing unemployment stuck near 9 percent.

Boost the Economy

The minutes said an unspecified “number” of officials
wanted to keep further asset purchases as an option to boost the
economy as policy makers saw “considerable uncertainty” that
U.S. growth will pick up.

Additional asset purchases would constitute a third round
of so-called quantitative easing after the Fed bought $2.3
trillion in housing and government debt in two rounds from
December 2008 to June 2011.

“The clear message here is that we are heading toward
quantitative easing three,” which may come in the first quarter,
said Harm Bandholz, chief U.S. economist at Unicredit Group in
New York.

Bandholz forecasts the economy to slow from an annual pace
of 1.5 percent to 2 percent in the third quarter to 1.3 percent
in the current period and 1 percent in the first quarter of next
year. Such slow growth rates will keep unemployment high and
force the Fed to expand its balance sheet further from $2.86
trillion today, he said.

Too Large

Policy makers also decided on Sept. 21 to reinvest maturing
housing debt into mortgage-backed securities in part to keep the
Fed’s Treasury holdings from getting too large and possibly
causing a “deterioration in Treasury market functioning,” the
minutes said.

The FOMC left its benchmark interest rate in a range of
zero to 0.25 percent, where it’s been since December 2008 and
reiterated language from its August meeting that the rate is
likely to stay very low through at least mid-2013. The rate is
now contingent on “low rates of resource utilization and a
subdued outlook for inflation over the medium run,” the
statement said.

The Standard & Poor’s 500 Index of stocks pared gains after
the report, rising 1 percent to 1,207.25 at the close in New
York. Yields on 10-year Treasuries rose 6 basis points, or 0.06
percentage point, to 2.21 percent.

‘Risk of Deflation’

Some officials said expanding the Fed’s balance sheet
further “would be more likely to raise inflation and inflation
expectations than to stimulate economic activity and argued that
such tools should be reserved for circumstances in which the
risk of deflation was elevated,” the minutes said.

The Fed is considering further easing and disclosure as it
faces pressure and criticism from politicians, especially
Republicans. Former House Speaker Newt Gingrich called Bernanke
a “disaster” in an Oct. 11 Republican presidential candidate
debate in New Hampshire sponsored by Bloomberg News and the
Washington Post. Republican lawmakers, including House Speaker
John Boehner of Ohio, sent letter to Fed officials last month
urging them to forgo additional easing.

Bernanke may need to use the press conference, potentially
next month, to provide more clarity to the public on the Fed’s
use of unconventional monetary policies, said Dan Greenhaus,
chief global strategist at BTIG LLC, a New York market maker
whose clients include the largest institutional investors in the
U.S.

“There is an enormous amount of confusion among the
politicians and citizens at large about what the Fed is doing,
and it may get to the point where Bernanke may just have to
speak English,” Greenhaus said. “I don’t see any other way
than to use the press conferences as a clear megaphone.”